One of the most important parameters to judge a business’s quality is its ability to generate a return on the money it employs on fixed and working capital. It is also one of the key metrics, which when measured over years, can help you assess a management’s quality.
Return on capital employed or ROCE also indicates a business’s ability to set prices that enables it to earn adequate margins, which when better than competitors also suggests the presence of moat.
Simply defined, ROCE shows how a company uses its capital efficiently by examining the profit it earns in relation to the capital it uses during a given year.
The formula commonly used to calculate ROCE is – Profit before Interest and Tax (PBIT) divided by Capital Employed (Equity and Debt).
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